Does the mid-quarter convention affect depreciation calculations for a vehicle placed in service late in the year with Section 179 and bonus depreciation already taken?
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Yes, the mid-quarter convention can affect depreciation calculations for a vehicle placed in service late in the year, even when Section 179 and bonus depreciation have already been taken. Here’s a detailed explanation of how the rules interact, based on the relevant sources:
1. Order of Deductions: Section 179, Bonus Depreciation, then MACRS
- Section 179: You may elect to expense part or all of the cost of qualifying property (such as a vehicle) in the year it is placed in service, up to the annual limit and subject to business income limitations. This deduction is taken first.
- Bonus Depreciation: After Section 179, you may claim bonus depreciation (100% for property placed in service after January 19, 2025, under current law) on the remaining basis, provided the property is eligible.
- MACRS Depreciation: Any remaining basis after Section 179 and bonus depreciation is depreciated under MACRS, using the applicable method, recovery period, and convention.
2. Mid-Quarter Convention: When and How It Applies
- The mid-quarter convention applies if the aggregate basis of MACRS property (excluding real property and property placed in service and disposed of in the same year) placed in service during the last three months of the tax year exceeds 40% of the total basis of all MACRS property placed in service during the year.
- The convention affects the timing of depreciation deductions for the year the property is placed in service and the year it is disposed of. Under the mid-quarter convention, property is treated as placed in service at the midpoint of the quarter in which it is actually placed in service, rather than the midpoint of the year (as under the half-year convention).
3. Effect on Depreciation Calculations After Section 179 and Bonus Depreciation
- Section 179 and bonus depreciation are both calculated before MACRS depreciation. If the entire cost of the vehicle is expensed through Section 179 and/or bonus depreciation, there is no remaining basis to depreciate under MACRS, so the convention is irrelevant for that asset.
- If any basis remains after Section 179 and bonus depreciation (for example, if the Section 179 or bonus depreciation limits are reached, or if you elect out of bonus depreciation), the remaining basis is depreciated under MACRS. In this case, the mid-quarter convention determines the portion of the first year’s depreciation deduction, which will generally be less than if the half-year convention applied, especially for property placed in service in the last quarter of the year.
4. Depreciation Calculation Example
Suppose you purchase a vehicle for $60,000 and place it in service in December. You elect to expense $31,300 under Section 179 (the 2025 SUV limit), and claim 100% bonus depreciation on the remaining $28,700. In this scenario:- Section 179 deduction: $31,300- Bonus depreciation: $28,700- Remaining basis for MACRS: $0
Result: No MACRS depreciation remains, so the mid-quarter convention does not affect the calculation for this asset.
If, however, you only claim Section 179 and elect out of bonus depreciation:- Section 179 deduction: $31,300- Remaining basis: $28,700 (subject to MACRS depreciation)
If the mid-quarter convention applies (because more than 40% of your MACRS property was placed in service in the last quarter), the first-year MACRS deduction for a 5-year property placed in service in the fourth quarter would be 5% of the remaining basis, rather than 20% under the half-year convention.
5. Summary Table of Conventions (for 5-Year Property)
6. Listed Property and Business Use
For vehicles (listed property), you must use MACRS straight-line over the ADS recovery period if business use is 50% or less. The convention (mid-quarter or half-year) still applies to the calculation of the first-year deduction.
7. Conclusion
- The mid-quarter convention only affects the MACRS portion of depreciation, not Section 179 or bonus depreciation.
- If Section 179 and bonus depreciation fully eliminate the basis, the convention is irrelevant.
- If any basis remains, the mid-quarter convention can significantly reduce the first-year MACRS deduction for property placed in service late in the year, such as a vehicle placed in December.
In summary: The mid-quarter convention does affect depreciation calculations for a vehicle placed in service late in the year, but only for the portion of the cost not already deducted under Section 179 or bonus depreciation. If Section 179 and bonus depreciation fully offset the cost, the convention has no effect. If any basis remains, the mid-quarter convention will generally reduce the first-year MACRS deduction compared to the half-year convention.
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